Looking for Income? Get It Before the Fiscal Cliff
The fiscal cliff is currently dictating the trading action in the stock market as we near December and the year’s end. The worry is that if the Bush-era tax cuts are allowed to dissipate, the end result would likely be a significant jump in taxes, including those on dividends. The prevailing dividends tax of 15.0% is extremely accommodative to income seekers, but under the fiscal cliff, we could see the tax on dividends for the highest tax bracket surge to 39.6%. For dividend investors, this means a massive jump in taxes in 2013.
Let’s take a look. Say you earn $100.00 in dividends and you are in the top tax bracket. (Want to know the top stocks for the rich? Read “QE3 and the Rich: What Stocks Will Benefit?”) You would pay $15.00 in dividend taxes now, but if you receive the $100.00 dividend on or after January 1, you’d pay a whopping $39.60. The increase would see U.S. dividend taxes approach those paid by Canadians.
With the uncertainty of whether the fiscal cliff will be resolved, we are seeing numerous U.S. companies paying out special dividends to shareholders now to avoid a potential massive tax hit later caused by the fiscal cliff.
From the end of September to mid-November, Bloomberg says that 59 companies belonging to the Russell 3000 Index announced special cash dividends, compared to 15 companies in the same timeframe in 2011. (Source: “Special Dividends Surge Fourfold as U.S. Tax Increase Looms,” Bloomberg Businessweek, November 19, 2102.) The move to initiate special dividends is not a surprise, and I expect the payments to continue over the next few weeks unless a deal is struck.
Assuming the fiscal cliff is coming, as an investor, you want to try to receive some dividend income this year at the lower tax rates.
Costco Wholesale Corporation (NASDAQ/COST), which usually pays an annual dividend of $1.10 per share, announced that it was paying a special dividend of a whopping $7.00 a share, or seven percent of its prevailing share price. That’s around $3.0 billion in payouts, but the company is looking to what benefits its shareholders. You still have a chance to partake, as the special dividend is payable on December 18 to shareholders of record on December 10. Companies that have strong cash reserves, like Costco with $4.9 billion, will be looking to pay out some cash to shareholders at this time before rates ratchet higher.
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As I discussed, the special payouts are not limited to the large-cap stocks. Small-cap Movado Group, Inc. (NYSE/MOV), armed with about $156 million in free cash, declared a special dividend of $0.75 a share to be paid in December.
Other companies announcing special dividends that you can still get in on include Wynn Resorts, Limited (NASDAQ/WYNN), offering an $8.00 special dividend; Las Vegas Sands Corp. (NYSE/LVS), offering a $2.75 special dividend; and Dillard’s, Inc. (NYSE/DDS), offering a $5.00 special dividend.
Bottom line: take the money now and enjoy the lower taxes.